The Non-Correlation Between Board Independence and
Long-Term Firm Performance

43 Pages Posted: 3 Jan 2003  

Sanjai Bhagat

University of Colorado at Boulder - Department of Finance

Bernard S. Black

Northwestern University - Pritzker School of Law; Northwestern University - Kellogg School of Management; European Corporate Governance Institute (ECGI)

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Abstract

The boards of directors of American public companies are dominated by independent directors. Many commentators and institutional investors believe that a "monitoring board," composed almost entirely of independent directors, is an important component of good corporate governance. The empirical evidence reported in this Article challenges that conventional wisdom.

We conduct the first large-sample, long-horizon study of whether the degree of board independence (proxied by the fraction of independent directors minus the fraction of inside directors on a company's board) correlates with various measures of the long-term performance of large American firms. We find evidence that low-profitability firms increase the independence of their boards of directors. But there is no evidence that this strategy works. Firms with more independent boards do not perform better than other firms. Our results support efforts by firms to experiment with board structures that depart from the conventional monitoring board.

Notes: This paper previously appeared in SSRN journals under the title "Do Independent Directors Matter?"

JEL Classification: G34

Suggested Citation

Bhagat, Sanjai and Black, Bernard S., The Non-Correlation Between Board Independence and Long-Term Firm Performance. As published in Journal of Corporation Law, Vol. 27, pp. 231-273, 2002. Available at SSRN: https://ssrn.com/abstract=313026

Sanjai Bhagat (Contact Author)

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States
303-492-7821 (Phone)

Bernard S. Black

Northwestern University - Pritzker School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States
312-503-2784 (Phone)

Northwestern University - Kellogg School of Management

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-5049 (Phone)

European Corporate Governance Institute (ECGI)

Brussels
Belgium

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